Rather than “super profits,” President Emmanuel Macron is clamoring for a stock buyback. During his afternoon interview on TF1 and France 2, the head of state condemned “cynicism” of some “Big Companies” Who benefits? “Their income is so exceptional that they use this money to buy their own shares”.
Not to mention, the head of state, targeting oil conglomerate TotalEnergies and its 20 billion euro profit by 2022, plans to launch a two-billion-dollar share buyback program in the first quarter.
But even carmaker Stellandis or BNP Paribas, which wants to buy back 1.5 billion of its own shares this year, will allocate the proceeds from the sale of its US subsidiary to the buyback plan. up to 5 billion euros. In total, the CAC 40 companies – which have accumulated more than 140 billion in profits in 2022 – must allocate at least 15 billion euros to share buybacks.
Neutral effect for shareholders
This attack on share buybacks from a former investment banker may come as a surprise. As a numbers man, he should have known that there is no economic difference between dividend payments and share buybacks, other than tax (stock buybacks are generally not taxed or taxed very little).
In either case, the shareholder automatically sees a drop in the value of his share (the amount of dividends or canceled shares, of course, is offset by the percentage increase in his ownership). “Like ATM withdrawals never make you rich, dividends and share buybacks never make shareholders rich”, Summary by Pascal Quéry and Yann Le Fur, authors of the Vernimmen letter.
According to corporate finance theory, dividends and share repurchases are tools that allow the reallocation of capital in the economy. During his last annual meeting in Omaha last February, Warren Buffett, the American pontiff of family investment, recalled this. “If someone tells you that all stock purchases are harmful (…), you have to deal with an economic illiterate or a delusional demagogue”.
Because even in America, the champion of stock buybacks (more important than dividend payments), this redistribution system is criticized by Democratic administrations. During his State of the Union address last February, US President Joe Biden strongly condemned the divestment of oil companies, which raked in $200 billion in profits last year.
“It’s a shame. They haven’t reinvested enough of this profit, which will boost domestic production and lower petrol prices.”, which he explained contradicted his environmental beliefs! As a result, Joe Biden wants to quadruple the 1% tax on stock purchases now in place as part of his anti-inflation bill.
Impressive growth in share buybacks in France and Europe
In France, which has traditionally focused heavily on dividends, share buybacks have recently taken off at an unprecedented rate. Thus, according to Wernimman’s data, CAC 40 companies bought back 23.8 billion and 23.7 billion shares in 2021 (fiscal 2020) and 2022 (fiscal 2021), respectively. A period, it is true, is exceptional between the health crisis and the end of the crisis.
Since 2003, share buybacks have rarely exceeded 10 billion euros, except in 2007 (19.2 billion). It should also be noted that share buybacks have met with success with many large European companies. According to data compiled by Exane BNP, share buybacks in Europe will almost double to 161 billion euros by 2022.
By nature, share buybacks do not have the nature of an ongoing commitment like dividends. Companies appreciate this flexibility. Share buybacks are also linked to exceptional transactions, such as L’Oréal’s sale of its stake in Nestlé (10 billion euros, i.e. more than 40% of total CAC 40 buybacks in 2021) or the sale of Banc of the West by BNP Paribas for $16.3 billion.
Even TotalEnergies does not have a well-established policy on share buybacks: it bought back 6.4 billion euros worth of shares in 2022, but only 140 million euros a year ago.
The choice of distribution rate to shareholders and its distribution method (dividend or redemption of shares), investment policy (or remuneration policy) is obviously for each company its maturity, its strategy, its specific decision. markets and its investors (US investors especially like to buy back stocks). However, framing a tax policy on share buybacks remains complicated (if not justified) and can evaporate overnight.